Why Is Integra (IART) Down 11.6% Since Last Earnings Report?

A month has gone by since the last earnings report for Integra LifeSciences (IART). Shares have lost about 11.6% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Integra due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

Integra’s Q2 Earnings Beat Estimates, Margins Down

Integra LifeSciences delivered adjusted earnings per share of 33 cents in the second quarter of 2020, down 54.8% from a year ago. The metric, however, surpassed the Zacks Consensus Estimate by a stupendous 312.5%.

The adjustment excludes the impact of certain non-recurring charges like structural optimization, acquisition and integration-related, COVID-19 and intangible asset amortization expenses, among others.

GAAP earnings per share for the second quarter was at a break-even level, compared with the year-ago quarter’s earnings per share of 34 cents.

Revenue Discussion

Total revenues in the reported quarter declined 32.6% year over year to $258.7 million. However, the metric exceeded the Zacks Consensus Estimate by 1.4%. Organically, revenues dropped 31.3% year over year.

The revenue decline can be attributed to lower surgical procedures related to COVID-19.

Notably, despite the fall in revenues due to the pandemic-led impacts, it exceeded the company’s expectation of $254-$256 million which was provided along with the preliminary results announced early last month.

Segmental Details

Coming to product categories, revenues from the CSS segment fell 31.9% to $169.8 million (organically, decline was 30%). However, the segment witnessed steady monthly improvement throughout the quarter. The global neurosurgery sales were better than the segment’s average sales during the quarter. Although neurosurgery sales were down mid-single digits in June, a strong recovery in neuromonitoring, CFS management, and dural access and repair was registered as these products are used in urgent procedures.

International sales in CSS, although lower, performed better than the segment average, led by strength in Japan. Also, a more moderate impact of the pandemic and investments made over the past year in Japan (including the successful launch of DuraGen in 2019) contributed to the top line.

OTT revenues totaled $88.9 million in the second quarter, down 33.9% year over year. Organically, the segment fell 34%. Although the OTT segment recorded a fall in revenues, it has started to recover. The recovery is being led by sales of the company’s shoulder solutions.

Margin Trend

In the reported quarter, gross profit totaled $153.2 million. Gross margin contracted 333 basis points (bps) to 59.2% on a 36.2% fall in gross profit. Per the company, adjusted gross margin was 66.2%, down 120 bps.

Selling, general and administrative expenses contracted 29.8% to $116.1 million in the quarter under review, while research and development expenses fell 15.4% to $14.9 million.

Overall, adjusted operating profit was $22.2 million, down 61.1% year over year. Adjusted operating margin saw a 628-bp contraction year over year to 8.6%.

Financial Position

Integra exited the second quarter of 2020 with cash and cash equivalents of $360.9 million, up from $357.7 million at the end of the first quarter.

Cumulative net cash flow from operating activities at the end of the second quarter was $53.9 million compared with $78 million in the year-ago quarter.

2020 Outlook

Given the current economic situation due to the pandemic, Integra is unable to assess the magnitude of its impact on its financial results. Hence, the company has not provided any financial guidance for the year.

However, the company expects third-quarter revenues to be lower than the year-ago levels due to the pandemic-led fall in non-emergent surgical procedures. Further, the company does not expect the recovery rates for all its markets and product lines to be the same, thus leading to uncertainties about revenues.

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 9.59% due to these changes.

VGM Scores

Currently, Integra has a subpar Growth Score of D, a grade with the same score on the momentum front. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. Notably, Integra has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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